Stock prices can be misleading. That is the message that Elliott Management, the largest shareholder of NXP Semiconductors, was trying to convey when it argued on Monday that the company should be sold for significantly more than Qualcomm’s $38 billion cash offer last year.
The hedge fund, famous for its activist investor streak, disclosed that it had bought 6% of the Dutch company in August and that it would push for Qualcomm to pay more in the deal. On Monday, it said that NXP’s stock should actually be valued around $135, up from its current price of around $115 and the $110 per share offered by Qualcomm.
“We also believe that this offer has been acting as a ceiling on NXP’s stock price, keeping it depressed while the rest of the semiconductor sector experienced a strong performance since rumors of Qualcomm’s interest in NXP arose,” the New York-based hedge fund wrote in a letter to other NXP shareholders, which have hesitated to pledge support for the deal.
It is not clear what Elliott wants from Qualcomm, whose offer of $110 per share represents a 34% premium over NXP’s stock price before reports of the deal leaked. If the same premium was attached to Elliott’s $135 valuation, Qualcomm would pay around $181 per share for NXP, which would glob another $23 billion onto the deal. But that seems unlikely.
“We believe NXP’s prospects are bright. Approximately half of NXP’s revenue is exposed to exciting growth engines of the semiconductor market – automotive and industrial,” said the New York-based hedge fund, adding that it had hired UBS to conduct a financial analysis on NXP’s business, which it would share with other shareholders.
Only around 2.4% of NXP's outstanding shares have been tendered to Qualcomm. The San Diego-based company needs around 80% to close the deal, which would turn it into the world’s largest maker of automotive chips. To make matter worse, Qualcomm fell into a proxy battle after last month it rejected Broadcom’s $105 billion takeover bid as being too low.
On Monday, Qualcomm said in a statement that its offer is “full and fair.” The company added: “Elliott's value assertion for NXP is unsupportable and is clearly nothing more than an attempt to advance its own self-serving agenda.”
Elliott’s challenge comes two months after Richard Clemmer, NXP’s chief executive, warned that it is possible that the deal will not close until early next year. The companies needed more time to sway shareholders and resolve regulatory finger-wagging. The companies previously said that the deal would close before the end of 2017.
This has been a tough year for Qualcomm, which is brawling with Apple over allegations that it overcharges for its cellular communications chips. The company is also fighting a series of regulatory slaps over its patent licensing business on three continents. It has toiled to convince antitrust regulators in Europe that the NXP acquisition is harmless.
U.S. regulators quickly gave the green light to the deal, which combines two companies with different product portfolios. On the other hand, the European Commission halted the review in October after Qualcomm failed to present important financial documents to regulators, and the investigation's deadline still has not been reset.
The regulators worry that Qualcomm will package NXP’s standard essential patents with its own intellectual property, raising rates for 3G and 4G technology and preventing rivals from licensing NXP's technology. They also worry that the acquisition would put Qualcomm’s rivals at a significant disadvantage in the wireless chip market.
It would be a significant relief to strike a compromise with regulators. Qualcomm is grappling with a dizzying amount of blowback from customers and regulators, and without the NXP deal, it would lose out secure microcontrollers and communication chips that can be used in everything traffic lights and connected cars to thermostats and sensors.